Using Ladybird Deeds for Planning in Michigan

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Ladybird (or Lady Bird) deeds (more accurately described as Enhanced Life Estate deeds) have little or nothing to do with Lady Bird Johnson, for whom they are widely believed to be named. What they are is a way to transfer real property to another person on a contingent basis, while retaining lifetime use of the property, and ability to convey it, for oneself. The transfer to the contingent grantee is not complete until the death of the grantor, making the ladybird deed essentially a beneficiary designation for real property.

Ladybird deeds have been described as giving something with one hand, while keeping the power to snatch it back with the other. Why would anyone want to do this? Well, actually, ladybird deeds offer a number of planning advantages, particularly for single people in Michigan.

Ladybird Deeds for Medicaid Planning and to Avoid Probate

One popular use of ladybird deeds is to help the grantor of the property become eligible for Medicaid funds for long-term care without losing a homestead to the need to “spend down” assets. Medicaid “looks back”at transfers for years before eligibility is sought, so a grantor cannot simply transfer a home outright to a friend or family member. Because a ladybird deed retains an unrestricted interest in the real property, the Michigan Department of Health & Human Services does not consider the grantor to have improperly transferred the property.

The grantor can execute the ladybird deed either before or after qualifying for Medicaid. Because the ladybird deed transfers the property on the grantor’s death, the property doesn’t enter the grantor’s estate, and cannot be recovered by Medicaid.

In addition to Medicaid planning, ladybird deeds can also be used as an estate planning tool for both single individuals and married couples. Ladybird deeds, living trusts, beneficiary designations, and other transfer-on-death tools, can be used to bypass the Michigan probate process. Even with all of these devices in place, however, it is always advisable for one to have a simple will in place.

Capital Gains Tax Benefits for Grantees of Ladybird Deeds

In addition to the planning benefits for the grantor of a ladybird deed noted above, there are also benefits for the recipient, or grantee.

In addition to the planning benefits for the grantor of a ladybird deed, there are also benefits for the recipient.

Perhaps the most significant is the stepped-up cost basis for the property, minimizing any capital gains tax for the grantee if he or she sells the property. With a ladybird deed, the grantee or remainderperson does not have an ownership interest in the real property until the grantor’s death, so their basis will be the fair market value of the property as of that date.

To illustrate this, let’s say the grantor bought a house. At the time of executing the ladybird deed, the house was worth $150,000. At the time of the grantor’s death, the house was worth $200,000. When the grantee sold it, it was worth $250,000. If the grantor had simply transferred the house to the grantee, the grantee would pay capital gains tax on the difference between $150,000 (FMV at time of transfer) and $250,000 (FMV at time of sale). Because of the ladybird deed, she will only pay capital gains tax on the difference between $200,000 (FMV at the time of grantor’s death) and $250,000 (FMV at time of sale).

Limitations of Ladybird Deeds

Ladybird deeds do have many advantages, but there are limitations as well.

One limitation of the ladybird deed is that, due to the grantor’s retained interest, the grantee cannot use a principal residence tax exemption for the property until the grantor’s death. Also, if the grantee is beset by creditors, a ladybird deed may not be the best option. If the grantee’s interest in the property is characterized as a remainder, that interest is potentially subject to levy or execution.

If you’d like to learn more about ladybird deeds and whether they are the best option to meet your particular needs, we invite you to contact us to schedule a free initial consultation.

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